Monday, March 24, 2008

In the top-middle part of the cover of the current issue of Time you'll find the question, "The Blame-O-Meter: Who screwed up the economy?" Inside you'll find this story by Justin Fox with the following graphic which, unfortunately, is not available online:To be fair, part of the graphic extends to the right (not shown above) where blame for "Wall Street Wizards" comes in somewhere between former Fed Chief Alan Greenspan and President George Bush.

Casting further doubt on the impartiality of this otherwise fine article (i.e., does the President really deserve the most blame?) is that the least amount of blame (two ticks into the "Blameless" region of the Blame-O-Meter) is laid at the feet of "Home Buyers".

For those of you keeping track at home, yes, this qualifies as a "Greenspan Mess" sighting. Remember the rule - "Greenspan" and "mess" within one paragraph or 100 words of each other either vertically, horizontally, OR diagonally.

18
comments:

I think the president qualifies for his high blame ranking, but Greenspan deserves to be tied with him, certainly.

Readers of this blog know the reasons why for the latter, of course.

For Dubya, however, the logic is a little less direct: it's because dollar recycling is at least as responsible (if not more so) for low mortgage rates and exotic products than the Fed's monetary policy. Brad Setser for instance has estimated that dollar recycling lowered mortgage rates by 1-2%.

And who is more responsible for all the deficit spending (and borrowing beyond this) than the national king of insecurity-ridden denial, Bush Minor? The war alone has arguably doubled annual Federal borrowing, never mind the fiscal deficit.

Anyway, even though the Fed lowered rates more than 1 or 2% back in 01-03, that does not constitute a 1:1 lowering of mortgage rates. For a proof by counter-example on that, note how the Fed has lowered rates 2-3% since last year, and mortgage rates have not gone down. This is because dollar recycling and other aspects of the secondary market for mortgages has evaporated.

Contrarians have been crying for years that we'd be paying the piper for chronic deficits. Well, he's here!

I always thought that, when the history books are written for this era, you'll see Bush and Greenspan side-by-side, similar to how they are pictured above, so they would be the top two on my list, but with Greenie first.

To be sure, there is plenty of blame to go around, but I always figured that on Wall Street and on Main Street, they were just doin' what they've always done - pushing the limits as far as they are permitted to push them.

In retrospect, the limits that were in place a few years ago were all wrong.

While I respect your general opinion, I must quibble with the basic premise of your argument...

How exactly does the president control "dollar recycling"?

If he does control it, why doesn't he turn it back on?

And, as an aside, defecit spending is typically inflationary, or at least dis-deflationary. Why, then are we seeing credit deflation?

I think many like to find a scapegoat when the blame-o-meter gives them the opportunity, when in reality, it is the blatant disregard for savings and basic economic illiteracy of most people between the ages of 20 and 65. I hardly think we can blame the current president for that issue.

Besides, we are facing the undercurrents of substantial illegal immigration that is on the one hand lowering wages, as well as lowering the cost of living.

I still don't see how someone can rightly blame the president for the current economic situation.

The mess in Iraq? Blame away, but I can't for the life of me understand a single argument after several years of hearing about it. It just doesn't fit. Dogpiling on a favorite political opponent doesn't win many people over. And, frankly, you should know better.

I agree with Chuck; it's hard to see how the president would directly control any aspect of the controls for the economy, aside from speeches about strong dollar policy and whatnot. You can certainly blame the government in general, and I think that's fair; but to single out one particular person or party is disingenuous (or obviously partisan, in the case of Time magazine).

I still maintain that the root cause was the strong belief in Wall Street that if/when risky investments went south, the banks would get bailed out by the government (and their executives would not be personally liable, and would keep their bonuses). How leveraged would IB's be in MBS's if the executives were personally liable for losses (at least to the extent of income from the IB)? How many mortgages would have been securitized if the rating agencies were held accountable for the aggregate default rate based on their ratings, and thus the MBS's were rated conservatively?

The best solution is to let the institutions collapse, and make sure everyone involved who hid information illegally also go down. Don't just make a few examples, make a clean sweep. Convince Wall Street that there won't be a bailout, now or in the future, and they must price in risk and rate securities realistically, or suffer the consequences. Assigning blame to the political scapegoats of the time, however feel-good, is counter-productive to fixing the underlying problem (IMHO).

I second that the president has very little t do with the economy. The blame lies entiely with the banks and smarties that thought loans gone wild was a good idea. ultimately, the average US citezen is to blame for buying in to the silly notion that 10,000 in home improvemants could make 100,000 plus on resale. Thanks for the predicament guys!

Wow, I'm struggling to find the words to express how disheartening it is to read posts like the ones chuck and nick just wrote. The only way I would edit aaron's post is to add a disclaimer that the "tax and spend" Democrats are as irresponsible as the "spend and print money" Republicans. It shouldn't be necessary to point this out at this juncture, but some among us fret more over partisan attacks than the potential destruction of our economic way of life.

The thesis of this blog, unless I'm mistaken, is that our irresponsibility and fiscal recklessness could potentially lead to economic meltdown, perhaps sooner rather than later. I'd say this is a serious matter and I somehow fail to see how our elected officials would be exempt from any blame in our current situation.

Here's a quote from nick that particularly irks me: "The best solution is to let the institutions collapse, and make sure everyone involved who hid information illegally also go down. Don't just make a few examples, make a clean sweep. Convince Wall Street that there won't be a bailout, now or in the future, and they must price in risk and rate securities realistically, or suffer the consequences."

That's all well and wonderful, but how are we supposed to accomplish this with exactly ZERO political will? Do you see any effort from Congress or the Bush administration to bring this to fruition or even question the validity of the Goldilocks economy? Other than Ron Paul and a tiny minority of malcontents, I don't.

As for Bush himself, I would hasten to add that he did not discover his veto pen until July 2006, and that was over lifting funding restrictions on stem cell research. Do you have any conception of how much insane spending he greenlighted over the previous five years? Bush also nominated Easy Al for his fifth term in 2004 so we could be treated to more wacky Fed misadventures. As for Iraq, the costs are estimated to be in somewhere well into the trillions, depending who you ask. I would also question what we have accomplished with such lavish spending in our Middle East wars, but that would make me a partisan hack (even though the Dems supported the war too) so I'll refrain.

I expect Joe Sixpack to effectively defend the status quo since he's long since been lulled to sleep by an insanely positive financial media. But to see readers of blogs like this one, who are privy to our economic woes, quibble over perceived partisan slights is extremely discouraging. Rome is burning and we can't even be bothered to lift a finger to combat the fire, lest we offend the sensibilities of two parties that are perfectly happy to perpetuate this economic charade until the bitter end.

No, politicians did not bring us to this situation alone. But until someone allows us to nominate Fed members, appoint CEOs, or somehow force the media to recognize economic reality, politicians are the one group we can potentially control. We may as well at least make a rudimentary attempt to do so.

One last thing, regarding the comments about blaming the average comsumer. Yes, people are crazy to spend themselves into debt up to their eyeballs. However, when we live in an economy disproportionally based on speculation and short term profit, can we really act surprised when people take extreme risks? Are these crazed consumers wrong to think that our politicans won't do everything possible to bail them out, no matter what the expense?

I hope I don't seem too angry in these posts. The more I read about our economy, the more I think people like me who save and live within their means are the true suckers. People who spend are just going with the flow, and if the economy crashes as badly as I think it might, we're all pretty much SOL together. Maybe I should invent a time machine so I could move to CA in 2003 to flip houses and live extravagantly.

Again, I have to state it once more. If the president controlled the former situation, and therefore the collapse, why can't he turn it back on.

I agree, if you're mad about the president for something he has done, flame away, but he does not control monetary policy, and we have an inflationary fiscal policy. I still cannot see how we can have deflation pinned on the current president. It just doesn't fit. Where's the link? What bills were passed? How does overspending accrete to asset deflation? It doesn't, it can't, and it won't. There just is absolutely no logical link that I have heard at anytime in the past 8 years that the president controlled housing prices going up or going down. It's neither his accolades when they went up, nor his discredit when they go down. Net-net, even as a much longer-term bubble blogger than I can see most others around here, I still see that most Americans have a much greater net worth today even after 20% or more declines of housing prices than in 2000. Problem is, I don't think the prices are sustainable, even at 2004, 2003, or 2002 prices. When housing is booming, it's not the president who caused it, nor is it his fault when it crashes.

I have to say it one more time.. there were people who piled on Bush 2 when things were going well for the average homedebtor who are still piling on after prices crash. These people just don't like Bush. yes, we get it, thanks for the political opinion, but don't try to treat the rest of the world like fools and tell us something that is a blatant falsehood.

To give former President Clinton a free pass on this one is irresponsible at best. With no mention of increased CRA lending due to his administrations edict, it's hard to take this article as anything more than a political blog.

Let's be clear. The Fed screwed up big time, but exactly who was President during a signficant portion of Greenspan's rule of terror? You got it. Wild Bill.

Additionally, the Clinton Admin. pushed too hard for change to allow formerly "redlined" areas to develop through aggressive lending by larger banks in order to maintain, or in some instances, increase, their CRA rating. The banks were in a lose-lose situation. Lend in the areas and suffer financial setbacks through write downs and foreclosures, or lose your CRA rating and become crippled with regard to expanding your geographic region through buyouts, mergers, etc.

I would certainly recommend an additional arrow pointing at "consumers." How else do you explain the blatant naiveity to accept an interest rate of 1.95%???

An additional arrow to mortgage brokers, who enjoyed fat premiums of 200 - 300 basis points while simultaneously charging 100-200 basis points to make these loans?

Let's not forget appraisers, who were more than happy to supply inflated values in order to keep their client (the broker and realtor) happy.

Oh yea, and last, but certainly not least, the realtor. Especially the "buyers" agent, who was supposed to represent the buyer and find the best possible scenario for his/her client.

There are not enough arrows to go around, and the industry is finished. Within 5 years, there will be no mortgage broker; instead, there will be six to ten big banks that control things start to finish, charging the same fees, same rate, same appraisal companies, same title companies. This is called an Oligopoly, and it's a position industry/bank leaders have been trying to get to for years.

After 15 years at various levels in this industry, I am done. I began wiping my hands of the mess three years ago when I began competing with used car salesmen that couldn't spell FHA if you spotted them the F and the H.

Now, I teach finance full-time with the hopes of educating future consumers one at a time.

You'll get no argument from me that Clinton was part of the problem. Really, every President who nominated Greenspan, beginning with Reagan, helped set unfavorable events in motion. This is especially true since Greenspan became a more active bubble blower in the late 90s, post "irrational exuberance". We should agree that the DNC and RNC are not chomping at the bit to return us to fiscal sanity. Hillary Clinton and Obama do not question the Goldilocks economy myth. I'm not even sure what the Dems stand for anymore. And look at how the RNC torpedoed Ron Paul, the one candidate that represented a challenge to the status quo.

chuck,

We seem to be talking at cross purposes. I question your contention that we are in a period of overall deflation. I could be wrong, but I feel that inflation is a greater problem, in which case excessive spending (and the subsequent printing of money to cover said expenses, along with widening deficits) are most definitely problematic. I pointed out that Bush nominated Greenspan to continue in 2004, which is a particularly difficult move to defend. I guess I'm just "flaming" though, since warrented criticism is apparently out of the question.

I also stated that Bush did not veto a single bill until July 2006, and only because that bill dealt with stem cell research. Look it up if you don't believe me. This information can be easily found.

I'm glad Tim posted this Blame-O-Meter because it highlights a major barrier to progress. Why make an attempt to address real world problems when we can quibble over political semantics and debate the merits of two absolutely horrible parties? Next time you see a partisan hack like Limbaugh, Franken, Hannity, or Garafalo, pat them on the back. They've done their job well.

At least we all seem to be able to agree on Greenspan, Mozilo, and Cayne. Now, if we can clear the final hurdle on the graph, we might actually get somewhere. Perhaps a lengthy disclaimer stating that when a politician from one party is named, it does not automatically mean that the other party is blameless is in order. It's silly, but if it brings us closer to the task at hand, I'm all for it.

Corporated greed and the trillions of dollars spent by our government over the last six years on the oversea wars in two countries, as well as pork programs in our country has sucked the money out of our economy, creating massive debt and a credit crunch. Lets not dismiss the fact that we Americans have also contributed to our own demise. Our instatiable appetite to have it all and pay for it later attitude has brought many in our country to financial ruin. I'm no supporter of the Fed Reserve and their manipulation of credit. The fact remains, we the people, our government leaders and corporate america could have prevented this by acting responsible rather then kids gone wild in a candy store free for all.We are an excessive nation!

A serious examination of the problem would first have to go back to the creation of the Fed in the early 20th Century. Inflation has been the norm ever since, and we occassionaly have periods when the Fed inflates too much and triggers a crisis.

Second on the list would be the New Deal. Social Security & Medicare changed people from savers to spenders. FDIC and other programs protected banks, financial regulation protected Wall Street.

If it wasn't this crisis, it would have been something else.

Proximate causes are Alan Greenspan (he's definitely the biggest player, by orders of magnitude), huge tax cuts for housing but not for other assets in the mid 1990's, regulation aimed at increasing loans to bad credit risks (redlining) in the 1990s, more government encouragement in the 2000s.

I believe the financial innovation is the least blameworthy. In a normal environment, the problems with the new systems would have been worked out over time. The Fed pumping money and government encouragement of housing triggered the massive problems. It's as if in the 1970s, the government got everyone to use computers, and then there were a lot of power failures and airline crashes.

"Second on the list would be the New Deal. Social Security & Medicare changed people from savers to spenders."

This is partially true at best: the social safety net in continental Europe is much more generous than in the US, yet they save, on average, a decent portion of their income...

Not to mention that w/o Social Security and Medicare there would be millions of old, sick and desperately poor people in the streets... Would not be a pleasant site, and I'm happy to pay my taxes to avoid it.

"Not to mention that w/o Social Security and Medicare there would be millions of old, sick and desperately poor people in the streets"

We could easily have a welfare program to cover people who do not have enough savings, and it would be very cheap because private investment blows away SS returns.

Comparing Europe to America is like comparing apples to oranges because of different economic structures. I could just as easily point out China, where savings rates exceed 50%, far beyond what is necessary due to a lack of social welfare. The fact is that without SS and Medicare, people would save a lot more.

Presidents get far too much blame (and credit) for the economy. Greenspan tops the list for sure, but I would put Congress in second place. Remember, they do all of the taxing and spending (although one can certainly blame Bush for the spending in Iraq). They have put in huge disincentives to save and invest (and incentives to buy housing). I would put the rating agencies in third place (they could have stopped all of this, and deserved to get sued out of existence), and the people themselves in fourth place (take some responsibility for your own behavior, please).